Non-banking finance companies (NBFCs) are looking to raise funds through non-convertible debentures (NCDs) at a frenetic pace to prepare for a gush of bad loans after the lifting of moratorium in August. The combined fundraising by NBFCs of roughly Rs 60,000 crore comes at a time when the long-term credit costs have surged to their highest level relative to short-term rates.
At least 10 NBFCs, also known as shadow banks, are currently in the market to raise funds with coupons ranging between 7 percent and 9 percent, possibly marking the highest level of fundraising by these institutions since they were beset by a prolonged financial crisis.
Manappuram Finance, for example, is raising 10-year NCD at 9.5 percent even as three to eight-month rates for commercial paper issuance of AAA rated companies have ranged between 3 percent and 4 percent.
NBFCs have been battered and bruised after the twin collapse of Infrastructure Leasing & Financial Services Ltd (IL&FS) and Dewan Housing Finance Corporation Ltd (DHFL). Their ruin has driven credit costs for some shadow lenders to the high teens.
Beset with burgeoning stressed assets and the liquidity crunch, many NBFCs are fighting to stay relevant as major state-owned and private banks stopped lending to them owing to fears about their financial health and businesses they lend to hurt from the blows of the coronavirus lockdown.
“NBFCs are building their war chest or survival capital as they prepare for a double whammy,’’ said Jayen Shah, cofounder at Mavuca Capital Advisors. “We will see the real impact of default, delays in servicing from the borrowers of these NBFCs after the moratorium is opened. On the other hand, scheduled NBFCs’ own debt servicing will be continuing.’’
L&T Finance is planning to raise at least Rs 150 crore through five-year bonds and has invited bids on July 9, said people from the banking and brokerage businesses familiar with the matter. They did not want to be named.
Manappuram Finance is accepting bids worth Rs 225 crore on 18-month bonds at 8.75 percent coupon. The company is also accepting bids worth Rs 7.5 crore on 10-year bonds at 9.50 percent coupon.
On July 8, Cholamandalam Investment had raised Rs 500 crore via five-year bonds at 7.92 percent coupon. Avanse Financial Services is raising funds via 18-month bonds at 8.75 percent coupon and invited bids on July 9, the persons cited above said.
Fundraising underway
Edelweiss Finance & Investments had raised Rs 113 crore through four short-term NCDs last month, according to data from NSDL website.
India First Life Insurance is planning to do a subordinate, unsecured, redeemable NCD with an issue size of INR 75 crore of 10 years maturity while LIC Housing Finance is looking to issue a 10-year NCD, according to person familiar with these plans. Tata Cleantech Capital Ltd is offering a bond at 7.6 percent with minimum Rs 25 crore while Tata Motor Finance Solutions Limited plans to launch unsecured NCDs between 7.5 percent and 8.5 percent coupon with maturity between 15 month and 3 years.
Mahindra Rural Housing Finance is in talks with banks for a 7.6 percent, 8 percent, and 8.25 percent bond issue for 3, 5 and 10 years issuances while Mahindra Rural Housing Finance plans to issue Rs 25 crore subordinate bonds for 7 years at 8.25 percent and for 10 years at 8.5 percent.
“Every NBFC is building war chest before the moratorium sunset,’’ Chhatradhari Chakravorty, managing partner at Discover Value Partners, said. “Such phases are known to crowd out riskier asset funding and credit spreads generally increase significantly.’’
Banks have disbursed around Rs 12,850 crore to NBFCs under the TLTRO scheme, according to a senior banker at Bank of India. In addition to this, state-owned banks can purchase up to Rs 45,000-crore bonds and commercial papers of non-bank lenders with a 20 percent one-time partial credit guarantee from the government. Effectively, the banks can subscribe to debt papers below AAA worth Rs 57,850 crore until August 20 of tenor between 8 months and 3 years, the banker said, asking not to be named.
NBFCs or their promoters will need to raise equity capital ahead of that unfortunate eventuality, Mavuca’s Shah said. The quantum of fundraising by NBFCs is at the highest level since the collapse of IL&FS, he said. The first half-year of calendar 2017 saw among the highest NCD issuances, he added.
Other Options: Short-Term Funds
To be sure, some AAA rated NBFCs are raising short-term funds at cheap rates by accessing the commercial paper market. Tata Capital Housing Finance has been able to raise funds via eight-month CP at 4 percent coupon while Godrej Consumer Products two-month CP at 3.3 percent coupon.
“NBFC is a business of liability and with easy liquidity all of them are boosting their balance sheet,’’ Vivek Gupta, managing director at investment banking firm Kaizen Partners. “Most of them are having huge negative carry. Once moratorium lifts people looking for money will first get it from NBFC’s only and we all know their margins are not shrinking anytime soon.’’
NBFCs are exploring all forms and routes for fundraising including tapping retail investors.
Of late, NBFCs have been focusing on private wealth investors who have re-surfaced on the investment horizon and these will also provide some solace, Mavuca’s Shah said. If timing suits then some of the NBFCs may re-tap the public issue of bond route, he said.
Santanu Chakraborti is a journalist who has been writing on the Indian equity and debt markets for the past 12 years.
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